Saturday, March 5, 2016

The jobs report for February showed a strong bounce back from a soft January with upward revisions to prior months. In a separate report last week weak fourth quarter GDP growth was revised up slightly, and inflation has moved closer to the Fed’s 2% target in each of the last three months. Would an increase in the federal funds rate at the upcoming March Federal Open Market Committee (FOMC) meeting be sheer madness? Investors seem to think so.

The Bureau of Labor Statistics (BLS) reported payroll employment expanded by 242 thousand in February and added a total of 30 thousand to the December and January counts. The unemployment rate was unchanged at 4.9% with large gains in both the labor force (555 thousand) and the number of employed persons (530 thousand). The labor force participation rate has gained 0.5 percentage point in recent months, reaching 62.9%, still low but erasing declines in 2015.

The Bureau of Economic Analysis (BEA) revised fourth quarter GDP growth up from 0.7% to 1.0%. In contrast to the slowdown in GDP growth, the BEA reported that inflation as measured by the price index for personal consumption expenditures, has accelerated. After hovering at 1.3% for most of 2015 the Fed’s preferred measure of inflation has climbed to 1.7% over the last three months.

Weak fourth quarter economic growth, soft January employment numbers and anxiety about the domestic effects of declines in economies and financial markets abroad have raised doubts about the timing of the Fed’s next interest rate increase. After the initial increase in December, the March meeting was the favorite among analysts. In the wake of recent economic data investors betting on the timing of the next hike have virtually taken the March meeting off the table (bets).

It will be interesting to see if today’s strong labor market report improves the odds of a March move among investors in the coming two weeks before the FOMC meeting. It will be interesting to see if the bets payoff.